As you know, the Fed stepped back from the market by announcing the end of the QE3 era last Wednesday. However, another major central bank, the BoJ, took over by increasing [eventually] the amount of its current bond-buying program by 10tr Yen to 80tr Yen (and tripled its purchases of ETFs to 3tr Yen). You saw the consequences since then, with USDJPY that tested a new 7-year high at 114.00, up almost 5 figures in two business days. The Nikkei closed above the 16,400 level on Friday (16,413.76), but didn’t participate to the overnight development as Japanese market were closed due to Culture ‘holiday’ Day.
To sum up, the Fed is done with QE [for the moment], however we have two other big players – ECB and BoJ – which are trying to do whatever it takes to keep pushing asset prices higher. As a reminder, the ECB plans to increase its total balance sheet by 1tr+ EUR within the next couple of years to come (now is it possible? That’s a different story. See article ECB dilemma: Whatever it can…).
It looks to me that the chart to watch now is the total big-4-central-bank balance sheet. As you can see it on the chart below, 10.5tr USD were injected into the market since the GFC; and from what we hear and read, we are far from done…
One thing that makes me uncomfortable at the moment is the sharp appreciation of the US Dollar against all the currencies. We believe even though US policymakers are conscious the USD will strengthen in the long term, however we think that they are looking for a slow and gradual increase.
In its last minutes, the Fed expressed its concerns about the rising dollar (too fast indeed is what they meant) and its negative effect on inflation and US exporters. The market has to accept that, otherwise the topic will come back on the table each time (minutes, meeting, semi-annual testimony…).
Quick update on the Euro
The single currency broke its strong support at 1.2500 against the greenback (which represents the 76.4% retracement of the 1.2040 – 1.3991 interval) and the pair is now trading at a 2-year [and 2-month] low, down 11% over the past six months. There are rumours (ECB Source) that the Fed launched currency war telling the ECB not to push it too fat (concerning its exchange rate). It tells you that the next and final retracement traders will look at is the 1.2040 low reached on July 20 2012.
We are still comfortable on being short EURGBP, targeting the 0.7750 retracement (entry level 0.8000, stop loss decreased to 0.8000). Watch the ECB and BoE meetings this Thursday.
We would like to add another position on today’s update: short AUDNZD at current levels (1.1270), with a target at 1.1140 at first and a stop loss above 1.1360. We know that the late inflation figures in NZ (which came in lower than expected at 1% YoY vs 1.3% consensus) will weigh on RBNZ officials to consider getting back in the tightening cycle, but we are comfortable with short the pair at the high of the range as you can see it on the chart.